The Antitrust Division's Devaluation of Standard-Essential Patents

In February 2015, the Institute of Electrical and Electronics Engineers (IEEE) became the first standard-setting organization to regulate the calculation of fair, reasonable, and nondiscriminatory royalties for standard-essential patents (SEPs). The IEEE made that transformative change with the encouragement and blessing of the Antitrust Division of the U.S. Department of Justice. The bylaw amendments aim to mitigate the risk of patent holdup and royalty stacking.

But the suggestion that SEP holders routinely extract supracompetitive royalties is disputed. In fact, the amendments broaden the binding provisions of IEEE’s fair, reasonable, and nondiscriminatory commitment; diminish the SEP holder’s ability to enforce its patent rights; and blindly lower the royalties that the SEP holder may charge a licensee.

In its business review letter, the Antitrust Division commended the bylaw amendments for addressing the risk of patent holdup and royalty stacking without analyzing whether those harms actually occur in the implementation of the IEEE’s standards. At the same time, the Antitrust Division ignored the countervailing concern that the bylaw amendments facilitate collusion among implementers to suppress the royalties they pay for SEPs.

On July 1st, Hudson Institute hosted J. Gregory Sidak for a conversation on current state of SEP regulation. Senior Fellow Harold Furchtgott-Roth moderated the discussion.